Proof That Government Development Aid Doesn't Produce Economic Growth

One of the big questions in both politics and economics is whether government development aid actually produces economic growth in the recipient countries. There's arguments either way of course: we could assume that poverty is the absence of the economic resources to produce the investment that leads to growth. We do rather assume this in the rich country economies after all: some capital is necessary to get a new business up and running to the point where it will contribute to the future increase in general wealth. So, maybe this is what ails the poor countries? At which point, given that many people think it's a bit unfair that some parts of the world are so much richer than others then why shouldn't some of the wealth be sent to the poverty?

We can also argue it the other way around. Assume, as many do, that economic development is reliant upon the institutions in an economy. Things like the rule of law and so on. And we only accept the presence of government either because they provide those things for us or they kill enough of us that we'll accept their oppression. But they'll only produce such public goods, the governors, if they have to. And aid might mean that they don't have to: enough income might flow into government coffers to buy those essential Mercedes for the mistresses that government doesn't need to tax the populace. At which point we're not worrying very much about the governors as we're not paying for them. This of course being a major argument from Angus Deaton, the recent economics Laureate.

Do note that this is all about development aid: this is not, at all, about emergency aid.

So, we'd really like to know whether this direct and official government aid actually does grow the economy or not. And there's an interesting new paper giving us an answer.

Their first finding is that politically motivated aid does not produce economic growth:

We exploit the increase in politically motivated aid the temporary members receive and analyse the effectiveness of aid as their UNSC membership changes, relying on previous research that shows membership in the UNSC to be unaffected by aid. Figure 2 summarises the results of our econometric tests.

We find that aid to countries temporarily serving on the UN Security Council is less effective compared to aid received at other times.

As the effect of politically motivated aid (the local average treatment effect, if used in an instrumental variables setting) is different from that of other aid, we conclude that political connections between donors and recipients are unhelpful in identifying the broader effects of aid on growth.

So, giving aid for political reasons (here, because a country becomes a temporary member of the UN Security Council) is less effective than aid given for other reasons. But we'd still like to know the effect of aid on growth in general:

We thus compare the effect of aid on growth in regular and irregular recipients of aid as donor fractionalisation changes.

Our results show no effect of aid on growth.

Development aid doesn't work then. Again, to emphasise, this is not about emergency aid, food to the starving, aid to those struggling after an earthquake. This is about the official development aid that governments hand out from our taxes.

And, as the finding above shows, it doesn't work. Not only doesn't it work, the aid we give for political reasons works less well than that. We should, therefore, simply stop doing this. Which is as some of us have thought for a long time. The last 40 years of globalisation have shown that the finest poverty reduction technique we have is trade. Thus our gift to the poor of the world should be that we tear down the rules that stop them from supplying things to us. For as Madsen Pirie of the Adam Smith Institute keeps insisting, the best driver of economic growth is to buy things made by poor people in poor countries. So, let's abolish those rules that stop us from doing that.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am....